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Goldman Sees SPAC Frenzy Unleashing $300 Billion In Takeovers Next Year

Goldman Sees SPAC Frenzy Unleashing $300 Billion In Takeovers Next Year
Tyler Durden
Mon, 12/14/2020 – 12:00

One of the remarkable stories of 2020, one which has sparked many comparisons to 2007 just before the credit/housing bubble popped,..

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Goldman Sees SPAC Frenzy Unleashing $300 Billion In Takeovers Next Year Tyler Durden Mon, 12/14/2020 - 12:00

One of the remarkable stories of 2020, one which has sparked many comparisons to 2007 just before the credit/housing bubble popped, has been the record surge of blank-check, or SPAC, issuance where investors - at a loss what to invest in - hand their money to a marquee investor who promises to find an appropriate investment over a given period of time or refund the money.

By way of background, a Special Purpose Acquisition Company (SPAC) is a "blank-check" company formed with the intention of acquiring or merging with another company. The SPAC needs to complete an acquisition within two years or the capital raised must be returned to investors. In a typical SPAC structure, the sponsor raises initial capital by issuing units consisting of 1 share and ½ or ⅓ of a warrant. The shares are generally priced at $10 and the warrants are typically struck 15% out of the money ($11.50) with a 5-year term and an $18 forced exercise.

To quantify the SPAC bubble, a record $70 billion has been raised in 206 initial public offerings by blank-check firms in the first 11 months of the year. Looking at this unprecedented flood into SPACs, some wondered if the good times may be ending: in an interview with Bloomberg last month, Olympia McNerney, Goldman's head of U.S. special purpose acquisition companies, described the U.S. SPAC market as being "perhaps too frenzied" and predicted volumes will become more "rational: as fund managers deal with what she described as indigestion.

"There has been a very meaningful uptick in SPAC issuance and we expect the market to be more selective going forward," said McNerney. One of the reasons why the SPAC euphoria is expected to ease, is that as investors allocate more capital to SPACs, some investors have hit internal limits governing their exposure to blank-check firms. But a far more tangible reason why the SPAC froth is likely peaking is also the simplest one: SPACs are no longer a get rich quick scheme: as recently as one month ago, 60% of October’s listings were trading below their offer price, the data show.

And although the recently launched SPAC ETF whose ticker is appropriately SPAK, slumped nearly 15% in following weeks, it has since more than rebounded hitting an all time high last week.

And since narrative follows price, just one month after one Goldman banker warned about a SPAC bubble, another came out of the weekend to declare 2020 as the year of the SPAC.

In his Weekly Kickstart note, Goldman chief equity strategist David Kostin writes that In history books, the year 2020 will forever be known for the deadly pandemic, but from a capital markets perspective, this year will undoubtedly be known as the year of the SPAC.

Here are some details: SPAC IPO capital raising in 2020 totals a record $70 billion, a stunning fivefold increase from last year’s record high that was itself up 44% from 2018. The 206 SPAC IPOs completed this year account for 52% of the record $124 billion of total US IPO capital raised YTD across 356 transactions. SPAC acquisition announcements and deal closures also hit record highs this year. 82 SPACs representing $28 billion in IPO capital have announced M&A targets this year while 36 SPACs have closed de-SPAC acquisitions totaling $51 billion in enterprise value.

In Goldman's view, there are three reasons why 2020 has been the year of the SPAC:

  1. SPAC sponsors shifted their focus from Value to Growth both in terms of completed acquisitions and new capital raising. Between 2010 and 2019, 53% of SPAC acquisitions were in the Industrials, Financials and Energy sectors while 33% were in Info Tech and Health Care. In contrast, 68% of the de-SPACs completed in 2020 were in the fast-growing Info Tech, Consumer Discretionary and Health Care (mostly in BioPharma) sectors while just 24% were in Industrials, Financials and Energy. Investors are firmly in a growth mindset and SPAC sponsors targeting purchases in growth industries have had success raising capital. Fully 53% of 2020 SPAC IPOs are seeking mergers in Tech, Consumer Discretionary, or Health Care.
  2. The acceleration in retail trading activity has increased investor appetite for non-traditional and early-stage businesses. SPACs offer an alternative route to the public markets for firms, including those that are early-stage or in businesses that lack many publically-traded comparables such as green tech, sports betting or cannabis. Lockdowns associated with the pandemic have prompted a surge in retail trading and demand for highly-volatile shares in firms with perceived hyper-growth prospects. Anecdotal evidence of heavy retail trading coincided with the de-SPAC purchases of electric vehicle and sports betting firms (e.g. FSR, DKNG).
  3. SPACs have low opportunity cost for investors when policy rates are near zero. Cash yields next to nothing and under the Fed’s average inflation targeting (AIT) regime, a hike is unlikely during the next three years (the Fed will likely be on hold until 2024). Investors in a SPAC receive a de minimis yield while waiting for the sponsor to identify a potential target and then have a  put option to redeem their shares if they do not like the potential acquisition. Of course, there is an opportunity cost of not owning equities given the 16% YTD return of the S&P 500 and our forecast of a 16% return next year. But SPACs can be a cash substitute when fed funds are at the lower bound. The focus on growth industries also means that SPACs are long duration assets that benefit from low long-term interest rates.

Clearly ignoring what his colleague Olympia McNerney said in November, Kostin this predicts that a high level of SPAC activity will continue into 2021 because, "simply put, the state of play outlined above is likely to remain in place." In other words, the warning of a frenzy has been completely forgotten (for now), and there is a reason for that: new SPAC issuance has only accelerated in 2H as 53% of the capital raised YTD has taken place since Labor Day. The most recent wave of issuance has broadened the universe of SPAC sponsors and lent institutional credibility to the SPAC process.

That said, and as we cautioned one month ago, weak returns represent one headwind to future SPAC issuance. Of the de-SPACs completed in 2020, the post-acquisition median 1-month, 3-month, and 6-month excess returns relative to the S&P 500 index have been -18 pp, -6 pp and -16 pp, respectively.

If such weak returns persist, even Kostin concedes that "investor appetite for new SPACs may wane." Worse, a distribution with poor median returns and a long right tail is consistent with the SPAC return profile as Goldman discussed in July and in its 2019 report which we presented to readers previously.

One factor that determines the performance of a SPAC is the presence (or absence) of supplemental equity. Consider that most SPAC acquisitions completed during 2020 have utilized supplemental equity financings through private investments in public equity (PIPEs) or private placements. Goldman's review of company filings found that 30 of the 36 SPAC purchases completed during 2020 raised PIPEs or private placements totaling $8.4 billion concurrent with the deal closure. These 36 SPACs had original IPO proceeds totaling $10.3 billion. The use of PIPEs or private placements allowed SPAC sponsors to nearly double their cash buying power before issuing any debt.

As Kostin explains, this ability of a SPAC to raise additional capital through a PIPE or private  placement at the time of a deal closing sends an important signal to investors. SPACs without PIPEs or private placements have dramatically underperformed in 2020. All six SPACs that did not raise incremental capital in conjunction with their mergers have posted negative returns relative to the S&P 500 from deal closure to today (an average of -42 pp vs. the S&P 500). The median return of the four SPACs without a PIPE lagged he median SPAC with a PIPE by 27 pp (-30% vs. -3%) during the three months following deal closure. When non-PIPE SPACs are excluded, the remaining 30 SPACs with PIPES posted median 1-month, 3-month, and 6-month excess returns following their mergers of -4 pp, +1 pp and +21 pp, respectively.

But the key message from Goldman's follow up analysis is that as of this moment, the $61 billion in equity IPO proceeds raised by 205 SPACs is currently searching for acquisition targets. Based on their 24-month post-IPO expiration dates, these SPACs will need to acquire a target in 2021 or 2022, nearly equal to the total enterprise value of SPAC deal closures during the last decade. If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion.

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Spread & Containment

Another beloved brewery files Chapter 11 bankruptcy

The beer industry has been devastated by covid, changing tastes, and maybe fallout from the Bud Light scandal.

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Before the covid pandemic, craft beer was having a moment. Most cities had multiple breweries and taprooms with some having so many that people put together the brewery version of a pub crawl.

It was a period where beer snobbery ruled the day and it was not uncommon to hear bar patrons discuss the makeup of the beer the beer they were drinking. This boom period always seemed destined for failure, or at least a retraction as many markets seemed to have more craft breweries than they could support.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

The pandemic, however, hastened that downfall. Many of these local and regional craft breweries counted on in-person sales to drive their business. 

And while many had local and regional distribution, selling through a third party comes with much lower margins. Direct sales drove their business and the pandemic forced many breweries to shut down their taprooms during the period where social distancing rules were in effect.

During those months the breweries still had rent and employees to pay while little money was coming in. That led to a number of popular beermakers including San Francisco's nationally-known Anchor Brewing as well as many regional favorites including Chicago’s Metropolitan Brewing, New Jersey’s Flying Fish, Denver’s Joyride Brewing, Tampa’s Zydeco Brew Werks, and Cleveland’s Terrestrial Brewing filing bankruptcy.

Some of these brands hope to survive, but others, including Anchor Brewing, fell into Chapter 7 liquidation. Now, another domino has fallen as a popular regional brewery has filed for Chapter 11 bankruptcy protection.

Overall beer sales have fallen.

Image source: Shutterstock

Covid is not the only reason for brewery bankruptcies

While covid deserves some of the blame for brewery failures, it's not the only reason why so many have filed for bankruptcy protection. Overall beer sales have fallen driven by younger people embracing non-alcoholic cocktails, and the rise in popularity of non-beer alcoholic offerings,

Beer sales have fallen to their lowest levels since 1999 and some industry analysts

"Sales declined by more than 5% in the first nine months of the year, dragged down not only by the backlash and boycotts against Anheuser-Busch-owned Bud Light but the changing habits of younger drinkers," according to data from Beer Marketer’s Insights published by the New York Post.

Bud Light parent Anheuser Busch InBev (BUD) faced massive boycotts after it partnered with transgender social media influencer Dylan Mulvaney. It was a very small partnership but it led to a right-wing backlash spurred on by Kid Rock, who posted a video on social media where he chastised the company before shooting up cases of Bud Light with an automatic weapon.

Another brewery files Chapter 11 bankruptcy

Gizmo Brew Works, which does business under the name Roth Brewing Company LLC, filed for Chapter 11 bankruptcy protection on March 8. In its filing, the company checked the box that indicates that its debts are less than $7.5 million and it chooses to proceed under Subchapter V of Chapter 11. 

"Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed," USCourts.gov explained. 

Roth Brewing/Gizmo Brew Works shared that it has 50-99 creditors and assets $100,000 and $500,000. The filing noted that the company does expect to have funds available for unsecured creditors. 

The popular brewery operates three taprooms and sells its beer to go at those locations.

"Join us at Gizmo Brew Works Craft Brewery and Taprooms located in Raleigh, Durham, and Chapel Hill, North Carolina. Find us for entertainment, live music, food trucks, beer specials, and most importantly, great-tasting craft beer by Gizmo Brew Works," the company shared on its website.

The company estimates that it has between $1 and $10 million in liabilities (a broad range as the bankruptcy form does not provide a space to be more specific).

Gizmo Brew Works/Roth Brewing did not share a reorganization or funding plan in its bankruptcy filing. An email request for comment sent through the company's contact page was not immediately returned.

 

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